Writing this time last year, I expected our economic fortunes to get better before they got worse. I saw clouds gathering on the distant horizon, but no major storms forecast for 2018.
Ireland isn’t quite partying like it’s 2006, but the stats don’t lie – 2018 has been a bumper year by most measures.
The economy generated nearly 1,300 extra jobs per week in the 12 monthsto end-September, up from less than 950 per week the previous year. Even if the pace of job growth slowed after the middle of 2018, this is still impressive progress by any measure, and enough to see the unemployment rate fall to 5.3% in November, down from 6.4% the previous year.
Although this is close to what economists call ‘full employment’, it should be remembered that the share of the working age population making themselves available for work is still (62.6%) significantly lower than its 2007 peak (67.4%). This flatters the unemployment rate and suggests there are still some 300,000 people that could be enticed back to the workforce.
Growth in average hourly earningshas picked up, from 2.1% a year ago to 3.2% now, more than double the growth rate from two years ago. The minimum wage will increase by 2.6% from New Year’s Day, from €9.55 an hour to €9.80.
Only part of the increase in people’s pay packets is being eaten up by higher prices. Consumer prices are basically flat, edging up only slightly from 0.5% in November 2017, to 0.6% in the same month this year. This average hides important differences: the cost of housing, water, gas and electricity increased more than 5% on the year while the price of furniture and household equipment fell by more than -4%.
This means real hourly wages are increasing in every sector with the exception of public administration, which clocked up only a 0.8% gain in the year to end-September.
With more people at work earning higher wages, it is hardly surprising that we are spending more. Ireland’s GDP figures are heavily distorted by multinational activity, but the most unpolluted – and least volatile – component is private consumption which grew by 2.9% in the third quarter of the year compared to a year earlier.
If things are going so well, then why are so many people worried there may be a recession around the corner, a re-run of the horror-show we lived through a decade ago. As yet, there is little sign that the Irish economy is overheating. We may be near full employment, but there’s at least a quarter of a million people outside the labour force that could be enticed back in. Wages are rising, but not precipitously so. Price inflation is still minimal. If it wasn’t for external factors, the Irish economy has room to keep growing strongly for years to come. But, as we well know, Ireland is – for better or worse – more exposed to global economic developments than most other countries. This is where the rising risk of recession comes from.
Ireland’s consumer confidence index has trended downwards through 2018, the decline picking up pace in the second half of the year despite a modest pick-up in November. Unlike other data points mentioned above, this is considered a signal of what is to come rather than a measure of something that has already happened.
There is an old saying in economics that when the U.S. sneezes, the rest of the world catches a cold. This is less so than in the past, partly because emerging Asia (and specifically China) has come to rival the U.S. as the main driver of global growth. For countries like Mexico and Ireland, however, the phenomenon is as strong as ever because of the strength of their trade and investment links with the U.S.
The U.S. is likely to post GDP growth north of 3% for 2018. This may not sound impressive compared to the ‘Leprechaun’ levels we have become accustomed to in Ireland, but it is well above their 21stcentury average. If anything, U.S. GDP is (slightly) underestimated for the same reason that Ireland’s is (grossly) overestimated: it is mainly their multinationals operating in Ireland, after all. At the same time, U.S. unemployment is the lowest it has been in half a century.
The main reason U.S. growth was so strong this year is the stimulus effect from tax cuts and higher public spending, but this will dissipate in 2019 and later years. Interest rates are expected to continue rising through the first half of 2019. An uneasy trade truce with China could give way to all-out war in Spring, with a ratcheting up of tariffs feeding through to higher inflation, and potentially even higher interest rates. All have negative implications for growth. There is no doubt that U.S. growth will slow next year: the question is by how much. Fears have been growing of an outright recession sometime before the next Presidential election in November 2020. Different from a year ago, the U.S. is a relative outlier. Much of the rest of the global economy has already begun to slow, led by Europe.
Then there is Brexit. Already, a weak sterling has hit our indigenous exporters hard. Continued uncertainty is likely constraining investment in some sectors, and it could be one of the reasons why consumer confidence has fallen off a cliff in the past six months despite the otherwise rosy economic picture.
With no end in sight to the chaos across the water, fears are growing that the U.K. could crash out with no-deal in three months’ time. I still see this a slightly less than a 50-50 chance, but the odds have definitely tightened in recent weeks. No matter what type of Brexit – hard, soft or something in between – the island of Ireland can be expected to be hardest hit economically – more so even than Great Britain.
If the U.S. economy slows but continues to grow at 2% or more, and if Brexit is postponed, softened or cancelled, there is no reason that Ireland can’t continue on its current path for a couple of years at least. The gathering storm could pass us by. But, no matter how strong the fundamentals of the Irish economy may seem, the risk is that they resemble a house of straw in the face of a perfect storm.